TETRA Technologies, Inc. (TTI) Q2 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to TETRA Technologies, Inc. Second Quarter 2017 Results Conference Call. The speakers for today's call are, Stuart Brightman, President and Chief Executive Officer; and Elijio Serrano, Chief Financial Officer for TETRA Technologies, Inc. [Operator Instructions]. And please do note that today's event is being recorded. I will now turn the conference over to Mr. Brightman. Please go ahead.

Thank you, and welcome to the TETRA Technologies Second Quarter 2017 Earnings Conference Call. Elijio Serrano, our Chief Financial Officer, is also in attendance this morning and will be available to address any of your questions. I will provide a brief overview of the quarter, then turn it over to Elijio for some additional details, which will in turn, be followed by your questions. I must first remind you that this conference call may contain certain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by TETRA and are based on a number of factors. These statements are subject to a number of risks and uncertainties, many of which are beyond the control of the company. You are cautioned that such statements are not guarantees of future performance and that actual results may differ materially from those projected in the forward-looking statements. In addition, in the course of the call, we may refer to net debt, free cash flow, adjusted EBITDA, adjusted profit before tax or adjusted earnings per share or other non-GAAP financial measures. Please refer to this morning's press release or to our public website for reconciliations of non-GAAP financial measures to the nearest GAAP measures. These reconciliations are not a substitute for financial information prepared in accordance with GAAP and should be considered within the context of our complete financial results for the period. In my remarks, I would like to cover an overview of the second quarter and our outlook for the rest of the year as well as going into 2018. During the second quarter, we continue to see favorable trends consistent with what we have discussed previously. Most importantly, our increase in activity in North America continues to benefit several segments, primarily our Fluids and Compression businesses. Our Fluids business second quarter revenue increased 22% sequentially. That was driven primarily by the commencement of a significant Gulf of Mexico TETRA CS Neptune Fluids project. In addition, our water management business in North America continues to ramp up significantly, and we saw the benefits of our normal seasonal uplift in our European chemicals business. We continue to invest significantly in expanding our water management business and believe this positions us to grow throughout the balance of the year and beyond. New contract awards for completion fluids internationally are expected to benefit the second half of the year as well. Our Compression business also showed incremental improvements. Most importantly, the key metrics continue to show positive trends. Our compression services utilization increased 78.9%, up 190 basis points sequentially. Our total horsepower deployed increased by 10,357 horsepower, driven by increasing demand for gas gathering systems, particularly in West Texas and Mid-Con. We have incurred make-ready cost related to idle equipment. It is our expectation that we will deploy up to 40,000 additional horsepower by year-end. Aftermarket services continues to ramp up as our customers begin to catch up on their maintenance and leased dock parts to maintain their fleets. We have added sales resources to accelerate the growth in this area. Our new equipment backlog was $24 million at the end of the quarter. Since the quarter, we have added $7 million of new orders, and we are extremely confident that our new orders in the second half of the year will significantly exceed the first half and give us a major backlog as we enter 2018. My final comment regarding this business is that we implemented our new ERP system for CSI Compressco on August 1. Initial feedback has been excellent, and the team remains extremely confident in our ability to generate over $4 million of annualized savings, in addition to working capital improvements associated with reduced field order -- field inventory and faster invoicing. Overall, the team believes we have a best-in-class operating system that will deliver significant operational sales and back -- savings and provide better visibility and a more responsive approach to our customers. Second quarter Production Testing Division revenue decreased sequentially by 26% with an adjusted EBITDA loss of $613,000. As noticed -- as noted on our call in May, the first quarter included a significant equipment sale in South America. In our backlog, we have several international early production facility sales that are likely to take place in the second half of 2017. These projects, in conjunction with an improving U.S. testing environment, are expected to result in improved earnings in the second half of the year. Our Offshore Services segment revenue increased 8% from a year ago and $19.9 million from the first quarter. This improvement was lower than what we anticipated due to inclement weather conditions that pushed some projects into the second half of the year. Adjusted EBITDA was a slight loss in the quarter, but was an improvement of $3.2 million compared to the first quarter. While the volatile commodity prices have resulted in certain customer jobs being pushed into next year, this is being offset by new awards. We continue to believe our major assets will work well into the fourth quarter. TETRA-only adjusted free cash flow for the quarter was $6 million, an improvement of $20 million from the first quarter of '17. As stated previously, the second half of the year is anticipated to be much larger, primarily due to the collection of some of our major projects and the seasonality of our Offshore Services business. We still expect to generate between $20 million and $40 million of free cash flow for the year. TETRA's balance sheet continues to be solid. The CSI Compressco, we believe that our actions associated with the distribution cut earlier this year and the bank amendments previously announced, when combined with improving earnings, gives us confidence with the CSI Compressco balance sheet. Overall, we are very pleased with the quarter. The trends that we had seen and continue to see and remain very optimistic as we invest into our North America business both in Fluids and Compression. We expect these trends to continue through the second half of the year and into 2018 and beyond. With that, I will turn the call over to Elijio to provide more financial highlights.

Thank you, Stu, and good morning, everybody. TETRA revenue of $208 million increased sequentially by 24%, reflecting the seasonal improvements in offshore decommissioning and the Northern Europe fluids sales in addition to higher equipment sales at CSI Compressco and the start of a large CS Neptune project in the Gulf of Mexico. On a consolidated basis, adjusted EBITDA included -- excluding Maritech initial charges, was $28.5 million, with adjusted EBITDA margins of 13.7%. Given the environment, our EBITDA margins reflect the strong market position and competitive advantages we have in Fluids and Compression. We see momentum in all our business lines to carry us into the third quarter. I'll next provide some details and insight on each of the segments and close with comments on TETRA's balance sheet and cash flow. Fluids revenue increased sequentially by 22% to $89 million. In addition to the seasonal increase in fluid sales in Northern Europe, we also saw stronger activity from our international offshore completion fluids. We also started in late June our latest CS Neptune project in the Gulf of Mexico. We have been on this project since late June and continue on it through today. We expect to record revenue in the third quarter at approximately the same amount that we recognized in the second quarter from this project. Water management has remained at robust levels reflecting the fracking activity in the shale plays that require more water than in prior years. To keep up with this demand, we have ordered more lay flat holes to increase our capacity. We are pushing prices to take advantage of demand exceeding capacity in several of the basins. This is an area that we expect to continue to see improvements into the coming quarters and will be a focus area of our capital allocation. Adjusted EBITDA for Fluids was $21.7 million and was the highest since the fourth quarter of 2015. Second quarter Fluids adjusted EBITDA margins were 24.3%. We anticipate margins in this range into the third quarter, given the CS Neptune project we are [indiscernible] continued strong activity levels in water management. We anticipate another CS Neptune project before the end of the year. Looking forward, and beyond these 2 projects, the Fluids management team had advanced discussions with several customers and have identified opportunities for CS Neptune that could materialize in the first half of next year across several regions around the globe. Production Testing revenue decreased sequentially by $5.6 million as the first quarter included the sale of an early production facility in South America. Our United States Production Testing revenue was up 24% sequentially, reflecting the stronger flow back testing activity levels from the back of the higher rig count, particularly in the Permian and Delaware Basins. Adjusted EBITDA was a slight loss of $612,000 or 4% of revenue as pricing remains under pressure from excess capacity in the industry. We expect to see improvements in the third and fourth quarter. Additionally, we are working towards completing an additional early production facility sale later this year and have opportunities for others in 2018. Compression Services Division revenue of $75 million increased $9.8 million or 15% on higher aftermarket services activity and new equipment sales. Utilization improved sequentially from 77% to 78.9%, and total horsepower deployed increased by 10,357 horsepower, driven by increasing demand for large gathering systems. Based on client queries and discussions, we expect utilization to continue to increase into the third and fourth quarters at pricing above the levels that we saw last year. The higher demand is coming from the areas that we have the strongest market exposure, being Permian Basin, Delaware Basin, Mid-Con and South Texas. We have initiated orders for engines and compressors to begin building large horsepower equipment for our fleet to keep up with increasing demand that we are seeing from our customers, as they deal with associated gas coming from their drilling programs. We are also seeing opportunities to deploy equipment internationally, specifically Argentina, and are responding to those opportunities. All in all, we are seeing a very robust rebound in activity for equipment in multiple markets and are responding accordingly. We are beginning to push up pricing given the demand, particularly in the large horsepower gathering systems. Equipment sales increased 156% with gross margins of 8.3%. This compares to gross margins in the first quarter of 4.8%. For CSI Compressco, adjusted EBITDA of $17.5 million was flat compared to the first quarter. However, in the first quarter, CSI Compressco reimbursed TETRA $1.75 million for G&A supporting equity instead of cash. In the second quarter, this G&A support was reimbursed 100% in cash. Normalizing for the equity reimbursement of G&A, adjusted EBITDA that reflects the core earnings of the business increased sequentially by $1.7 million. This is consistent with the $1.2 million improvement in gross margin and a $536,000 reduction in G&A expenses for CSI Compressco. We are clearly starting to see the core earnings improve for CSI Compressco. We believe Q1 was a valley of the earnings when taking into account G&A cost not reimbursed in equity. CSI Compressco's leverage ratio at the end of June was 6.12x, safely within the covenant of 6.75. CSI Compressco free cash flow, defined as cash flow from operations, less total capital expenditures net of sales from proceeds of equipment, was $5.3 million, an improvement of $10.7 million from the first quarter. The improved free cash flow in the second quarter is also indicative of the momentum of the improving earnings despite the higher maintenance capital expenditures. Last week, on August 1, as Stu mentioned, we successfully launched our new fully integrated ERP system for CSI Compressco. This system harmonizes and automates our operations, sales and back-office operations. We now have all our field technicians electronically connected to our ERP system in the field with the use of handheld mobile devices. All our sales organizations are logging in real-time quote and proposal times, and have improved their turnaround time and visibility to our business. We anticipate annualized savings of over $4 million, of which we have already recognized $1 million from the consolidation of the IT and accounting functions. The additional savings are coming mainly at the field level. In addition to cost savings, we expect to have significant working capital improvements from better management and visibility of inventories in parts, just-in-time deployment of components and from more timely invoicing practices. We believe the system we have developed and deployed is a unique system in the sector. We built this from over state-of-the-art technologies from Oracle, Salesforce and SAP. A lot of management time and effort went into developing this system, creating an entire organization and deploying it without slowing down the business. Offshore Services revenue increased $19.9 million from the first quarter, reflecting the seasonality of the business. While this was a strong sequential increase, it was below our internal expectations as we experienced inclement weather conditions that pushed several projects into the third and fourth quarters. We expect to see a meaningful improvement in revenue in the third quarter relative to the second quarter. Adjusted EBITDA was near breakeven at a loss of $324,000. We are also expecting a very meaningful increase in adjusted EBITDA in the third quarter, relative to the second quarter, as the third quarter is traditionally our peak earnings period. When the price of oil dipped into the $43 range, we did see some customers curtail activity and push projects into 2018. Nonetheless, we are expecting a very solid third quarter from Offshore Services. Free cash flow in the first quarter for TETRA and excluding CSI Compressco, but including the distributions received from -- by TETRA from CSI Compressco, was $6.1 million, an improvement of almost $20 million over the first quarter. This improved free cash flow was despite a ramp-up in working capital as volumes increased. Traditionally, we monetize late in the third quarter and throughout the fourth quarter, the receivables we build up as activity ramps up in Northern Europe, Gulf of Mexico decommissioning and the CS Neptune projects. Early in the quarter, we already are seeing this as we collected in July the receivables associated with the Neptune revenue booked in the -- at the end of the second quarter. As a result, we are leaving our free cash flow guidance at the previously announced goal of $20 million to $40 million for the full year. As a result of the stronger free cash flow in the second quarter, TETRA-only net debt declined from $125 million at the end of March to $119.5 million at the end of June. On TETRA's $200 million revolver, we only have $22.5 million outstanding at the end of June, giving us the flexibility and the financial wherewithal to invest in Fluids, particularly in water transfer, where we are seeing better pricing, shortages of capacity and increasing demand. Our Fluids manufacturing has ability to significantly ramp up to meet increasing onshore demand and to respond to higher activity levels offshore when that market returns. We will also evaluate market -- water management acquisition opportunities when we believe we can leverage our network and infrastructure. We are also adding additional distribution points to address the Delaware Basin and in the Rockies as calcium chloride opportunities keep presenting themselves with a higher rig count. This incremental distribution points require very little capital. And with that, let me turn it back over to Stu.

Thanks, Elijio. And let's open the line for questions.

[Operator Instructions]. And our first questioner today will be Sean Meakim with JPMorgan.

So Stu, maybe I wanted to start with the Fluid margins, thinking about the progression in the second half. I know, on prior calls, you've been reticent to maybe disclose the magnitude of some of the drivers between Neptune, some international seasonality and then water management. But given how accretive Neptune seems to have been historically, and its impact in 2Q was only for less than a month, I'm just curious why you wouldn't necessarily see another healthy leg up in the third quarter.

Yes. I think, if you look at the Fluids progression second quarter sequentially, then look at the second half of the year, during the quarter, we got the expected uplift in our European chemicals business, exactly as we expected. We saw the continued progression of water and expect that's going to continue to ramp up. We did a portion of one of the wells. As Elijio said, we'll get that finished in the third quarter. We expect the other well to be done in the second half of the year. So I think if you look at the trends within Fluids. Neptune, we've talked about. Water will continue to improve. I noted on my narrative a couple of international fluids product jobs. So we expect to continue to have a very strong Fluids business going forward, and we expect that we'll get additional Neptune awards that will translate to revenue in 2018. So we're very bullish and feel strong as always that our Fluids business is going to continue to be a strength.

I think, if I could, just to follow-on to that. Can you give us a little bit of sense as, some of the incremental opportunities from Neptune, including a project you're expecting in the back half, as well as maybe some of the opportunities in '18? Are we expanding out the customer base a little bit? You mentioned geographic diversity starting to potentially improve next year. Could you give us a little more of what the opportunity set looks like?

Yes. We expect the next awards will be new customers, and it will be -- it's highly likely it will contain non-Gulf of Mexico activity. So we continue to be engaged in discussions with customers in the Gulf of Mexico outside the U.S., both in the North Sea, the Middle East and Latin America, all geographies we're engaged. And would I expect a portion of that next year will come from the international community.

And then you also mentioned that, the international fluids contracts. Could you give -- because you're going to ramp in the second half. Can you give us a sense of how many, duration, type of customers, a little more detail on what that impact could be?

Yes. It's a couple of projects that we have in the North Sea and a couple -- and some projects we have in the Middle East. In leveraging our cost position, in our footprint to expand the market share in some of those areas. It's not Neptune backlog. It's a traditional completion fluids that we have.

It would be incremental to what you had -- your existing business?

Yes.

And the next question today will come from Jacob Lundberg with Crédit Suisse.

Quick question, on the additional Neptune opportunity there you're talking about before the end of the year. Is that the half well that was deferred from the end of last year? Or is that something -- is that a new project that's incremental?

That's the well we've talked about that's in the backlog.

Okay. Okay, perfect. And then in Compression, what was the cost in 2Q associated with the ERP implementation? And then anything incremental in 3Q?

So the cost that we incurred in the second quarter was just training cost, a couple of hundred thousand dollars, not enough to move the needle. We'll have a, probably a slightly bigger amount in the third quarter, but we're also starting to recognize the benefits of lower cost by taking back-office resources out of the system now that we've automated some of that.

Okay. And then you mentioned you had already recognized about $1 million of savings from the ERP system. What's the time line to get to that full $4 million plus that you referenced?

So we want to give the system and the organization a couple of months to absorb the new processes and make sure that it executes consistent with our expectation. So I expect that, by the end of the -- middle to the end of the fourth quarter, we'll start aggressively taking advantage of the capability of the system in pulling cost out, so that the run rate will be in there early part of next year.

Okay, perfect. And then, when do you expect to start to see price increases in Compression, on the service side?

I think we have seen, during the second quarter, as we have put equipment to work, that the pricing of those new agreements is higher than the pricing of the new agreements that went out in the first quarter. So we've seen that trend. And now as we start to roll forward most of our agreements, our 12-month agreements, we'll start looking at those that roll current on a quarter-by-quarter basis. Any growth capital that we've approved, which we have and will continue to, is tied to customer agreements that are better priced than we had earlier this year. So we've started to see that. The map, it will take a while before some of the old stuff rolls off before we start to see the dollar per horsepower come up, but the good news is that inflection point is starting.

Okay. And so I guess, in 3Q, on a sequential basis, would you expect, if we just look at Compression service revenues per horsepower, do you think it'll be up in 3Q versus 2Q?

Slightly.

Slightly, okay.

And the next question today will come from Stephen Gengaro with Loop Capital.

Two questions and one to kind of follow-on to what Sean was asking about on the Fluids side. When you look at, historically, kind of looking at this European business and the impact on the second quarter, it's always obviously pretty significant. But then you talked about Neptune. Can pretax income in Fluids be flat in the third quarter?

I think if you look at it in -- the sequential pieces would be -- Neptune, we said, was second quarter, third quarter, so that should be similar. Clearly, the chemicals business in Europe is up in the second. So sequentially, that will be down, which is the same every year. And then the rest of the business, I think we'll see improvements internationally. And I think in some of the non-major projects, Gulf of Mexico, we'll see slight improvement there. And clearly, we expect our water business to be up sequentially in the third quarter. You put all that together, I think it should look similar. It might even be up a little bit.

And Stephen, I'll add that we mentioned we're adding quite a bit of lay flat holes to our fleet that's starting to arrive. We're starting to see that impact. So I think the water management business will also be up quite nicely.

Okay, great. Now that's very helpful color. And then, just following up briefly on the CSI side. And I know -- off the call yesterday, you had one question that came up. The sales side of that business, is it -- it was obviously up sequentially pretty nicely. Should -- and I guess we would see some growth in general, but will that be lumpy in the second half? How should we think about that piece of CSI?

So we've got a $24 million backlog, and we believe that the vast majority of that $24 million backlog is going to get delivered in Q3 and Q4. And then we also mentioned yesterday that, since the end of the quarter, we've already picked up another $7 million of backlog, but that won't be delivered until Q1 of next year. So we think that we're going to see a little bit of consistency in Q4. And if some of the orders that we're quoting on right now that are advancing materialize, that has the capability to build also consistency into Q1 and Q2.

Yes. And Stephen, just to add to that. We -- there's always a mixed portion of CCLP when you hit that lumpiness. You'll see the revenue go up when we have a big quarter on the Fab. The margins on that are clearly 10% as opposed to the mid-40s we typically we have on Compression services. So the thing that I want to make sure we highlight appropriately is, we did have some make-ready cost in the second quarter to get the fleet back to work. We expect that will be less in the second half of the year. We expect the utilization will continue to grow. We expect the pricing will increase slightly as we start to get some of the new contracts. The sum of all that is we're very comfortable with sequential growth of that business going forward. And we're seeing positive trends in the fleet. We're seeing positive trends in the equipment sales, and we're seeing positive trends in the aftermarket. And as Elijio said, as we go into the new year, there will be $3 million, $3.5 million of incremental expenses that come out next year versus this year. So when you start doing the bridge on that business, there's a lot of compelling reasons why we feel very comfortable with that.

And that $3 million, $3.5 million comes out of the SG&A line, right?

A lot of it's going to be at the operations level. We take advantage of the system that gives us efficiencies at the field level.

And the next questioner today will be Marshall Adkins with Raymond James.

Stu, the biggest disappointment versus, I think, expectations here was the Offshore Services side. And you mentioned weather delays. I -- we haven't heard a lot about weather delays in the second quarter. So could you elaborate on what happened there? And how, presumably, you have confidence in that getting better going forward?

Yes. There was a tropical storm, I believe, in late May, early June that pushed out a lot of work. I think if you talked to some of the E&P shelf operators, you'll kind of get reconfirmation of that. So that was probably the better part of the week where a lot of that got pushed out and recalibrated. And -- so that was the big impact there. That was the biggest part of the bridge as to why that adjusted EBITDA was less than we expected as well as what you expected. And what we're seeing is, we've got a healthy backlog in one of our major assets going to the fourth quarter. We've had certain customers shift some of their spend, by design, into next year as the commodity prices bumped around $44, $45 over the last 60 days. We've had most of that backlog replaced with new activity out there. I mean, we are getting -- we are increasing our market share, getting more than our fair share of that business. And we think most of that shortfall that we saw will be made up in the second half of the year.

But it sounds like there's a modest pullback in -- from the E&P guys just due to the low oil prices. Is that fair?

I would say, at a macro level of total spending and decommissioning, Gulf of Mexico shelf is a modest reduction on that from where that would have been 90 days ago. Our challenge is to continue to take market share, which we're doing, to offset that total market decrease.

Right, okay. So follow-up question -- or it's really more of a broader question. I presume, in that segment, you're not getting any real pricing. But could you hit the pricing trends kind of in your other key areas? For example, on the water management, I presume, since you're adding lay flat hoses, that pricing and margins are pretty good there. But could you just kind of highlight where you're seeing prices -- pricing trends in the other key areas?

Yes, certainly. Yes, so let's touch on a few -- let's repeat a couple of things we've said and let's cover the other. Compression was putting new equipment out in the fleet. That's higher priced than before. We see that trend improving. Lay flat, water, we're putting in investment. The market's good. It's growing. We're seeing pricing improve. Domestic testing, slight improvement. I mean, I think it's improving, but not nearly at the rate as we see on the water. But we definitely believe both price and activity in the second half of the year will improve. And we believe that segment will go positive EBITDA as we go through the second half of the year. Part of it domestically, part of it's a couple of projects we have in the backlog that will shift to second half of the year. Non-Neptune Gulf of Mexico, flattish. That hasn't come down the way other onshore services are. So that's still fairly robust. Offshore Services, flattish, for the reasons we mentioned. So I think you've got some that flat, some that are up a little, and several big ones that are up significantly. Water in particularly, would be the highest pricing inflection out of all the businesses we have as we've sequenced through the first couple of quarters we projected out for the balance of the year. And again, that correlates to where we're putting our capital investment, the balance of the year.

And the next questioner today will be Al Shams with American Capital Partners.

So what I gather from the call is, balance sheet looks like it's in good shape. Overall, we've got a nice second quarter with an opportunity for some nice improvement in the latter half of the year. So I'm surprised, in view of such a nice presentation, that the stock has done so poorly. So any thoughts with respect to that?

I think you summarized our view of our outlook very well, and we -- I think, given the events of the second quarter and the biggest piece of what was different than we -- was expected was the weather on our Offshore Services. All the other elements were very similar to what we expected. We feel good about the second half. We've demonstrated positive trends on Compression. And all the stuff, we feel very positive on. And again, not checking the stock price, as we're having the discussion, I'm surprised at the reaction. I think, I am very surprised, but we will continue to focus on the positive part of the business and execute accordingly.

And Al -- this is Elijio. I'll add that, historically, third quarter and fourth quarters for us have been very strong from a free cash flow perspective. Over the past years, the vast majority of our free cash flow has come in the second half of the year, particularly if our business peaks right around the summer. And then we are able to monetize all of that AR late Q3 and Q4. We expect that as we generate that free cash flow in Q3 and Q4, we will probably see a market reaction favorable to that.

Okay. Going back to around March, there were some insider transactions. So I'm presuming you guys thought the company, the stock was undervalued at that time. Is there any flexibility at the corporate level to do even a modest buyback of stock?

We think, at this point, that the available liquidity that we have is best utilized at investing and taking advantage of the strong markets such as the water management side, where the returns are very attractive. And we will be hesitant to use capacity in the revolver knowing that the market has remained a bit choppy. We saw oil pull back to $43. Some of our operators started deferring some of their programs. So we think that keeping a strong balance sheet is the prudent thing to do at this time.

Okay, okay. Lastly, is it likely that there may be some further insider transactions once a window opens?

Hard to predict. I can't speak on behalf of others where the window is not open. And I think, historically, if you look at it, the leadership team's been very active in buying and always exudes a ton of confidence in the business. I think that's something we've done consistently over a period of time.

Okay. Just to kind of maybe reiterate, what do you think the market is missing that just aren't getting with this price at $2.20 a share?

And I think, all the elements of -- what we've talked about on the call of, we still remain confident the free cash flow for the year is $20 million to $40 million. We feel, we've got the Neptune in the backlog. We feel good about the second half of the year. We had seen positive trends that have resulted in earnings in the second quarter, and we expect to improve in the future on North America, both in Compression and Fluids. So it's just the totality of the financial outlook, that drive the free cash flow that we will communicate that out as appropriate after the call, as we clarify some of the questions. But I think the story is fairly -- is very robust and positive, and the management group sees it that way.

And the next questioner today will be Chris Colvin with Breach Inlet Capital.

So I saw you sold some equipment -- or I guess my question is, what equipment did CCLP sell to TTI in the first quarter? And then did they sell any equipment to TTI in the second quarter?

So make sure that we've presented the material right, Chris. There was no equipment sale between CSI Compressco and TETRA. TETRA provides G&A and back-office support for CSI Compressco so that they don't have to have their own legal department, payroll department and C&C reporting group. That is done on a consolidated basis. And then we charge the MLP for the appropriate cost. And historically, that cost has been reimbursed in cash. And in the first quarter, the MLP reimbursed TETRA in equity, given TETRA's balance sheet is very strong and CSI Compressco had an opportunity to reduce cash cost and improve their financial position. So that's really the only reimbursement done between CSI Compressco and TETRA that occurred between Q1 and Q2.

Okay. Well, I guess I'm referencing the earnings release. It says -- there's a footnote that says, "Included the elimination of intercompany equipment sale of $2 million." It's a footnote on CapEx for TETRA only.

That's all the TETRA without CSI Compressco, but I can do it...

Okay. That's inter-company, that's within TETRA.

Yes.

Okay. And then, maybe this can help with the other gentleman with, what I think the market's concerned with, and you can maybe touch on it is, TETRA only, which includes the CCLP distributions burned, by math, about 800 -- $8 million in the first half. So to get to the low end of your guidance, you'll need to generate $28 million in the second half, and you'll get about $6 million from CCLP. So basically, the true, TETRA-only needs to generate $22 million of free cash flow. And that burned $16 million the first half of the year and also burned $9 million the second half of last year. So you've touched a little bit on what's going to improve, but maybe the 2 or 3 drivers that's going to fill what seems like a pretty daunting task.

Yes. I think the two largest ones will be the execution and collection of a couple of the Fluids, the big projects, on Neptune. We expect that's going to be material -- favorable trend, second versus first, and just the seasonality of Offshore Services typically as we've indicated, the second half is bigger. And we've got, this year, some of that work getting pushed out. And in that work typically slows down as we get to the middle of the fourth quarter, and the vast majority will be collected. So those are the 2 big elements that would drive that free cash flow at the TETRA level that we need to get to get into that range. And we've got very good line of sight on both of them.

And Chris, let me give you a little bit of color. Let's sort of touch on Offshore Services. So Offshore Services revenue in Q1 was $8 million. In Q2, that was $28 million. And historically, Q3 is stronger than Q2. So you expect that Q3's going to be significantly better than $28 million in the second quarter. So that $28 million in the second quarter is monetized in Q3. That much higher Q3 number is monetized in Q4. And we begin monetizing some of the early October-November Q4 within the fourth quarter. That's going to be a significant cash inflow. The second thing is that Northern Europe has historically seen a significant ramp-up in revenue in Q2 that it gets monetized in Q3. And as Stu mentioned, that we're doing that -- the 2 Neptune projects. We started the one that we're on right now at the end of June. We've already collected in early July the amount that we built at the end of June. And then we'll complete that project in early August, and that will get monetized before the end of August. And then we start the next project and monetize that before the end of the year. So that seasonality has been there consistently. If you go back 3 years, when we generated $120 million of free cash flow, $80 million of that $120 million was generated in the second half of the year. And then the year before that, when we generated $80 million, $60 million of that $80 million was generated in the second half of the year. So there's quite a bit of seasonality in the business that drives free cash flow towards the second half of the year.

Got you. Okay. I just looked at last year, where you burned more free cash flow in the second half of the year than first half of the year.

Yes, last year, we had a lot of our projects that got pushed out into this year, including some of our Neptune projects that got delayed from Q4 to, into this year.

Got you. And then, you talked about kind of -- I asked this question on the CCLP call, and you talked about TTI's sound balance sheet. But when I look at the numbers, without CCLP's distributions, you're getting close to busting TTI's leverage covenant. And at the same time, you're close to breaching CCLP's covenant and likely will, if EBITDA does not improve. So somewhat of my same question, but maybe some more color to articulate to both existing perspective shareholders on both -- for both entities is, what is the plan, if the world, I guess, does not meet kind of these rosier outlooks? If we don't see the growth in EBITDA and you kind of have to make a decision on your CCLP distribution, while at the same time considering your own TTI covenant ratios?

Look, TETRA's covenant is 5x. And we're running somewhere in the 2.5x range. And that's with trailing 12-month earnings getting much stronger. We're dropping very weak quarters from a year ago, and replacing them with much stronger EBITDA quarters this year. So I see our TETRA leverage ratio continuing to improve, to where I feel comfortable that we're going to be under 2.5x leverage ratio, just with the visibility that we have right now, on the projects and earnings that are materializing. So the TETRA balance sheet is not a concern, that's not anything that keeps me up at night. On the CSI Compressco, we negotiated and pushed up covenants to 6.75, and then they dropped 25 basis points every 6 months. We're seeing a ramp-up in business. We're seeing a ramp-up in quote activity. We're seeing cost savings coming across from the system that we're implementing. We're seeing working capital improvements that will allow us to generate more cash and reduce debt so that CSI Compressco, I think, is tighter, but we're comfortable with it. And if there's any support needed on the CSI Compressco side, we've demonstrated that TETRA's balance sheet is strong enough and as a significant shareholder, that we're ready to step in and provide support. So at this point, I believe that both balance sheets -- and even when oil pulled back to $43, some of the major projects that we have are looking beyond $43 oil, and those projects are already underway. And we think that those earnings will strongly support the covenants that we have.

Okay. And maybe last follow-up on that. When you say TTI supporting CCLP, I know you've taken equity as opposed to cash for G&A, but that's -- we're talking about -- I guess, $2 million per quarter. What other levers does TTI have to pull to, I guess, help CCLP, but at the same time, not detriment TTI's shareholders?

TETRA has consistently demonstrated its support for CSI Compressco. When we did an equity offering last year, TETRA participated in it. When we did the acquisition, TETRA participated in it. I would suggest that TETRA's strong enough to support CSI Compressco, if the actions within CSI Compressco are not sufficient to address the current business environment.

And the next questioner today will be Martin Malloy with Johnson Rice.

Could you talk about the working capital reduction that you referenced related to the ERP system implementation at Compressco? And just maybe help us a little bit with the potential magnitude of that.

Yes, so I'll point of what's going to drive it. And I'll, at this point, refrain from laying out a target until I know that the system's performing exactly like we want it. So today, we've got parts distributed throughout the organization to support the mechanics as they go out and repair units. The system has given us real visibility to every component, every piece of equipment, whether it's in the back of a mechanic's truck, whether a distribution center or it's in a warehouse. So rather than begin to order parts locally, we can look throughout the entire network, find out where we've got oversupply of parts and components and ship those to those locations that have a need for other locations might have excess pieces of equipment, number one. Number two, we can go out and look at that volume of inventory that we have, and rather than restock to high levels, we can have real-time delivery from a lot of our suppliers. And therefore, we move to real-time delivery on many of the components that are readily available. Number three, this process has allowed us to automatically invoice every night for any work completed, such as aftermarket services, such as the installation of a new piece of equipment, such as orders coming across. We have automated the process to where you don't need manually, that the involvement to generate invoices in the process. And we can take out invoices on a nightly basis without any manual intervention. So the process of managing inventories, parts, components, the process of streamlining the invoicing process and doing that almost on a nightly basis without manual intervention, I think has a tremendous impact on working capital. And even if you were to reduce 10 days of DSO from the process, you can do the math and see what our revenue per day runs, which is about $0.5 million. You do a 10-day DSO improvement that quickly generates a significant amount of cash. So we're really excited about all the capabilities of having streamlined from A-Z, and all the benefits it's going to bring to us.

Okay. And then, could you maybe talk about the smaller horsepower units and what you're seeing on utilization there? And particularly, kind of interested in demand for gas reinjection and gas lift in the Permian and Delaware Basins.

Yes. I think you're seeing, on the smaller horsepower, which would be the gas jack and then some of the next size up, which would be gas lift, good positive trends. The gas lift certainly in Oklahoma, in the Permian, we're seeing good demand for that. We've seen that utilization go up. And we're starting to see the beginning on the gas jack move favorably, particularly in the traditional areas of production enhancement. So I think we're seeing positive trends there as well.

Okay. And then, if I could just sneak in one last question. The convertible preferred at Compressco. Could you maybe talk about some of the options to perhaps limit the potential dilution there at the current Compressco share price?

Couple of options available to us, Marty. The first one is that we have the ability to delay conversion of series A into common units onetime for 90 days. And we invoked that provision available to us, such that July, August and September will not be converted. Our impression is that if the market has not properly read the performance of CSI Compressco. I think yesterday's earnings call and today's earnings call allow us to articulate where the CSI Compressco business is and the momentum and the trends that it has. And we hope that, that call and yesterday's call helps bring a little bit of clarity in terms of the direction of the company. And that, I guess, reflected in the unit price. So we're not doing conversions until the month of October. Second thing is, if we wanted do, we could convert up to half of the Series A or $40 million out of the $80 million with cash instead of common units. Now at this point, we don't want to add more debt to CSI Compressco. So we're not about to do that in a cash transaction. But I think that if the markets were available and we found a better cost of capital. That is one option available to us. So those are the two immediate options that come to mind, but we believe that the improved financial performance of the business will get reflected in the unit price and that, that dilution will be less than the value than it's currently trading at.

And our next question will be a follow-up from Stephen Gengaro with Loop Capital.

Just a quick one, guys. When you look at the -- and this is a bigger-picture, longer-term question. But when you look at the Maritech liabilities that you bet are still with you, what's the timing on those as we go forward? Is -- I think I recall you saying it was an '18 event more than '17. But is that still the case? Or am I missing something?

Yes. Our intent is to do very little of that, if any, in the next 6 months. So it's certainly going to get pushed out to '18 and beyond.

Okay. All right. And then, in relation to that, as you think about TETRA as an entity over time -- I know Fluids and Testing are critical. How do you think about Offshore Services over the next 2, 3 years? I mean, I read some opportunities for abandonment here and internationally, but it never seems to materialize at the pace we expect. How is that business evolving?

Yes. I mean, I think we all have seen the international opportunities just not go at the pace we might have expected. So I think that's a very accurate observation. I think if we go to either -- the fundamental element is, a lot of work that needs to get done. There's a lot of wells and structures and pipelines that need to come out. There's a big backlog of work to be done. We are by far in the dominant position as a service company to execute that abandonment decommissioning in the Gulf of Mexico shelf. We're by far the strongest financially across all the services that, that entails. And we feel really good of our relative position in the backlog. The challenge has always been the pace of that work getting done. Oil pops down to $43, it gets pushed out a little bit. We've seen a lot of indications in the quotes and the backlogs as we went through the second quarter. And as I said on the earlier calls, I think that total spend for the year is going to be slightly less than we would have projected in the market, but we need to continue to take share, which is what we're doing. So I think those opportunities will be there. I mean, we've introduced -- we don't talk about it because it's not a big number. Very new abrasive technology over the last couple of years. And we've done great with that. We've added a second spread. It's fully utilized. Something we need to look at, a third spread. Our guys believe that will be fully utilized. But the hurdle rates we've set internally for that business are very high because it's competing with fluids, which is where we want to put our investment. We want to put it in water. We want to put it in building out our completion fluids. That's where we've invested. That's where we continue to consistently generate mid-20s and above EBITDA margins. And similarly, on the Compression, you see us start to redeploy growth capital into the large horsepower. We're at 90% approximately. We expect that number to go north of 90%. And we know where the investment pockets are. So we're not going to reinvest materially there. We always look at the portfolio. We really need to see a little bit more activity in that space before we really can think through the strategic element of it. But in the meantime, we -- it's a tremendous management group. They're executing great in a very tough market. And we're cautiously optimistic that we'll see some of that market spend increase as we go into next year. And Stephen, we've been very, very consistent quarter after quarter, reinforcing the message of the strength of our Fluids and Compression and allocating capital accordingly. We've been very pristine in the messaging, the communication and the execution of that strategy.

This will conclude the question-and-answer session. I would like to turn the conference back over to Mr. Brightman for any closing remarks.

Yes. Thank you. And as always, great questions. Appreciate the support, and we'll look forward to updating the group in 90 days. So thank you very much.

And the conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.